Oil In Retreat On Renewed US Supply Fears

Sharemarkets weren’t the only thing hitting the skids last week, oil is now on the edge of a major slide thanks to surging American production through a series of new record highs.

And as investors and others fret about last week’s big sell-off in shares because of inflation worries, they should pause to consider the impact of another oil price slide on all those fears about inflation (however modest the rise has been).

The slide is being driven by fears surging US production will swamp global markets and wipe out the positive price impact of the production cap engineered by OPEC and Russia.

While the impact of the surge in US production will be limited by rising demand from the global rebound, it could be enough to end the run up in prices and force them back under $US60 a barrel and closer to $US50.

Two years ago a slump in oil prices helped (thanks to a surge in US production as it recovered from the 2014 downturn) pull down other commodity prices, crunch inflation and slow the global economy.

A repeat on that is now on the cards with major metals, gold, copper down (but not iron ore) and oil slumping a US oil drillers pushed rug use to year highs last week.

Oil futures last week saw their biggest one-week slide since January 2016 as both West Texas Intermediate (WTI) and Brent, the international benchmark fell. Friday was also the worst daily fall since last July, according to Thomson Reuters and FactSet data.

WTI dropped almost 10% on the week, and 3.2 % on Friday, to fall below $US60 for the first time this year, closing the day at $US59.20. It fell further to $US59.05 in late trading.

Brent, the international benchmark, was also under the gun, dropping 8.75% and 3.1% for the day to close at $US62.79 a barrel.

Figures released on Friday by Baker Hughes GE, the US oil services group revealed the biggest weekly jump in the number of US oil-drilling rigs since January 2017, contributing to concerns about the impact of rising American output.

Baker Hughes on Friday reported that the number of active U.S. rigs drilling for oil jumped by 26 to 791 this week. That marked a third straight week of increases and the largest weekly rise in more than a year. More than 40 rigs have joined the hunt for oil in the US since the start of the year.

Until recently, oil prices have been supported by the 1.8 million barrels a day production cap from OPEC and other large producers.

Concerns over rising US oil production were finally focused by news from America’s Energy Information Administration (EIA) that weekly US output climbed 332,000 barrels to total 10.251 million barrels a day the week before last. That was a weekly record based on EIA data going back to 1983.

Oil stocks also increased by 1.9 million barrels in the week ending February 2.

A monthly report issued last Tuesday by the EIA showed higher a further rise in estimated US oil output this year and next, with 2019’s average output expected to top 11 million barrels a day.

Glenn Dyer has been a finance journalist and TV producer for more than 40
years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial
Review, The Nine Network and Crikey.

At the AFR he was a finance
writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network
he was supervising producer of Business Sunday for more than 16 years. He
has also written for other online and analogue print publications here and
overseas.